When forward-looking statements are accompanied by a legal disclaimer, inexperienced investors are more likely to forgive a company missing its projections even in cases where management is shown to have knowingly misled investors, according to a new academic study published in The Accounting Review.

'Licence to lie'

The research was led by H Scott Asay of the University of Iowa and Jeffrey Hales of the Georgia Institute of Technology. They contend that legal disclaimers protect public companies from reprisal and therefore harm vulnerable investors in the process, citing one attorney’s description that these disclaimers afford management the ‘licence to lie.’ The two academics drew conclusions from two separate studies examining the influence legal disclaimers have on non-professional investors, as they call them in the study. The report’s authors explain, ‘cautionary disclosures are viewed by non-professional investors as informative warnings, but they have difficulty translating that belief into a change in how they view the prospects of the firm when making a valuation judgment.’ Although the subjects of the study process disclaimers as a warning, which ‘has little impact on the extent to which they incorporate information from positive forward-looking statements into their valuation judgments’ providing ‘little protection from the economic harm that can result from undue reliance on forward-looking statements,’ the authors state.

Less boilerplate language needed

The authors argue their research shows legal disclaimers dissuade investors from seeking compensation when they have lost money, even when management has been proven to have acted in bad faith. The state, ‘Non-professional investors might protect themselves from placing undue reliance on positive forward-looking statements…by generating counter-explanations for why management plans might fail.’ The authors suggest, ‘cautionary disclaimers might be more effective if they contain less boilerplate language, are written in plain English, are presented more saliently or are integrated within the disclosure so that they qualify specific forward-looking statements rather than qualifying forward-looking statements more generally.’